October 2, 2008

The Senate grabbed hold of the Cash for Crash bill and finally came up with a workable version — one that may work for the Wall Street crapshooters but likely not for the rest of us, who are simply loaded dice in the palms of their hands.

Part of the complex maneuverings supposedly aimed at keeping the country from sliding into Great Depression II revolves around “mark-to-market accounting” of the assets that Wall Streeters have played with to the point of, literally, no return.

Yeah, like you, I have only a hazy understanding of this. Those who are financially alliterate are welcome to read this morning’s New York Post story “PIGGY POLS IN HOG HEAVEN WITH PORK-PACKED PACT.” Daphne Retter’s funny, funky take brings a little light to an otherwise dark day of journalism:

Here, little piggies!

Congressional deal-brokers yesterday slopped a mess of pork into the $700 billion financial rescue bill passed by the Senate last night — including a tax break for makers of kids’ wooden arrows — in a bid to lure reluctant lawmakers into voting for the package

Stuffed into the 451-page bill are more than $1.7 billion worth of targeted tax breaks to be doled out for a sty full of eyebrow-raising purposes over the next decade.

More to the point of your financial future and such no-longer-arcane topics as mark-to-market accounting, lower your eyebrows, peer through this morning’s financial fog and try to grab for this guidepost: Bankers and conservative Republicans (including former anti-populace populist Newt Gingrich) favor the abandonment of mark-to-market accounting rules. To which auditors, big investors, and consumer groups reply, “Are you out of your friggin’ minds?”

Think of it like the nursery rhyme that goes, “This little piggy went to market . . .”, and add some huffing and puffing by wolves that may eventually knock down millions of American homes.

In the present case, these little piggies went to mark-to-market, and now they want to remove that accounting rule so they can instantly wipe out their losses on the books and resume playing their Neverland gambling games with our money.

In essence, the new Senate version of the bailout bill would let Wall Streeters lie even more about the value of the assets they’re trading and set us up for a rerun of the Enron scandal.

That should help things.

Or maybe the financial system is so fouled up and so wedded to its inherently corrupt trading instruments and practices that abandoning mark-to-market accounting really would help restart the credit markets and protect you from foreclosure.

The banking industry and a band of lawmakers have used the scramble to salvage the financial-markets rescue plan to give new life to an industry push to avoid billions in further write-downs with the stroke of a regulatory pen.

It would just further cloud matters for me to try to paraphrase this, so here’s how Williamson and Scannell lay it out:

A proposal contained in the revised financial-rescue bill the Senate considered Wednesday reaffirms the Securities and Exchange Commission’s existing authority to suspend “mark-to-market” accounting. The language was meant to send a message to the agency to re-evaluate the issue.

The practice, adopted in the aftermath of the savings-and-loan collapse in the 1980s, pegs the value of assets to their current market price, rather than the price paid for them. Banks have complained the strict application of mark-to-market rules has forced them to write down billions of dollars worth of mortgage-related securities, intensifying the squeeze in the credit markets.

Critics of the proposed changes to the “mark to market” rules say gains created by easing the rules would be illusory and would delay resolving genuine doubts about the value of mortgage assets that has caused the recent crisis in confidence.

As Bloomberg’s Jesse Westbrookreported Tuesday, conservative Republicans might very well have supported the House version of the bailout bill if the SEC had suspended mark-market accounting rules.

U.S. accounting firms, which had been silent on the $700 billion financial-rescue package rejected by the U.S. House of Representatives on Monday, are opposing congressional efforts to scrap mark-to-market accounting rules. . . .

Some House members advocate scrapping mark-to-market accounting altogether as a way to help lenders holding mortgage loans and securities whose value have fallen sharply. Consumer groups have balked at the idea, and accounting firms are about to jump in as well, fearing such a change could deceive investors about the value of troubled loans and mortgage-backed assets.

Let the staggeringly diverse gaggle of opponents of abandoning mark-to-market accounting speak for themselves. This is what they told the WSJ‘s Burns and Bloomberg’s Westbrook:

• “It’s absolute idiocy,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “Allowing companies to lie to investors and lie to themselves is not the solution to the problem, it is the problem.”

• “Suspending the mark-to-market prices is the most irresponsible thing to do,” said Diane Garnick, who helps oversee more than $500 billion as an investment strategist at Invesco Ltd. in New York. “Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the
transparency of volatility in earnings.”

Although senators approved the bailout plan, lawmakers aren’t out of the woods yet. Conservative Republican members of the House are still calling for some sort of mandatory insurance program that financial firms would be required to buy, but it is unclear how the program would work.

They have also asked for the Securities and Exchange Commission to suspend mark-to-market accounting rules and instead require bank regulators to assess the real value of troubled assets.

Mark-to-market accounting essentially allows Wall Street firms to value (or “mark”) the assets in their portfolio based on current market prices. The problem, critics say, is that under that accounting rule, sliding home prices affect not just the value of mortgages that are defaulting but of all mortgages — and therefore, of all mortgage-backed securities.

That, in turn, affects how much capital firms are required to have on hand to cover their debt exposure. And to raise that capital, firms end up having to sell other assets — which drives the price of those assets down, too. In other words, they say, mark-to-market accounting can lead to a downward spiral.

House Democrats have been opposed to both a change in mark-to-market accounting rules and to the insurance provision. It is unclear how they will work out those differences or how much the House will tinker with the bill when they get it. That said, the sense on the Hill is that everyone wants to get the vote behind them, key lawmakers say.

That’s reassuring that our lawmakers — like pro athletes and philandering pols — want to pull out the hackneyed reasoning to say that all they want to do is get their past mistakes “behind them.” In real time, however, the train is still hurtling down the track toward us.